Hello,
I'm not sure to understand clearly the difference between FPIF and CPIF since both of them use incentive fee. Here is my attempt to diffentiate them.
FPIF:
The contract contains an incentive fee tied to achieving agreed-upon metrics (usually schedule). This is called the target fee ($30'000).
The target price ($180'000) is the sum of the target costs ($150'000) and the target fee ($30'000).
A sharing ratio (60/40) is set to reflect how under runs and over runs will be shared between the parties.
A ceiling price ($200'000) is specified and represents the maximum amount that may be paid to the seller.
The project is over and the buyer has agreed that the costs were, in fact, $210'000.
The final price to be paid to the seller is the sum of the final costs ($210'000) and the final fee ($6'000).
The final fee is the sum of the target fee ($30'000) and the additional fee resulting from the cost over/underun at the seller ration (-$60'000 x 40% = -$24'000).
The final price is $216'000. However, this amount is above the ceiling price of $200'000. Therefore, the final price (what the buyer will pay) is $200'000.
CPIF:
Again the contract contains an incentive fee tied to achieving agreed-upon metrics (usually schedule). This is called the target fee ($30'000).
Again the target price ($180'000) is the sum of the target costs ($150'000) and the target fee ($30'000).
Again a sharing ratio (60/40) is set to reflect how under runs and over runs will be shared between the parties.
But the difference lies here, in the fact that there is no ceiling price.
The project is over and the buyer has agreed that the costs were, in fact, $210'000.
The final price to be paid to the seller is the sum of the final costs ($210'000) and the final fee ($6'000).
The final fee is the sum of the target fee ($30'000) and the additional fee resulting from the cost over/underun at the seller ration (-$60'000 x 40% = -$24'000).
The final price is $216'000.
Some contract may include a minium or a maximum final fee.
So basically, the difference is between the presence or not of a ceiling price, the calculation of final price remains the same for both contract types.
Is that correct ?
Cheers
Cyril
